By John Persinos
This is John Persinos, editorial director of Investing Daily, with a video update for Tuesday, June 30. Today, I will discuss asset allocation, which is all the more important during the sort of market turmoil that currently bedevils investors. I'll also examine the dangers of the stock market bubble and a few opportunities that can provide "defensive growth."
Asset allocation is an art as well as a science. It's the investment alchemy whereby you balance several ingredients for the proper admixture of risk and reward.
An asset allocation policy entails dividing a portfolio's investments among different asset classes. The most common classes are stocks, bonds, cash and cash equivalents, and hedges (precious metals such as gold and silver; etc.). Sounds basic, right? Well, even seasoned investors sometimes ignore proper asset allocation. It pays to occasionally review investing principles.
Before I get to recommended allocations, let's examine the urgency of taking protective measures now.
Doubling down on the 2008 bailout...
Despite the delusional thinking of those who wish to downplay the crisis, the coronavirus pandemic is actually getting worse in some countries and the U.S. And yet, despite severe economic damage caused by a worsening pandemic, stocks have been rallying. Investors have the Federal Reserve to thank. But the stock market bulls are in for a rude awakening, especially if they're placing their hopes on a vaccine to miraculously solve our pandemic woes.
Read This Story: COVID Vaccine: Silver Bullet or False Hope?
The Federal Reserve has been keeping the stock market afloat through aggressive monetary stimulus. The Fed's balance sheet has swelled following its March 15 announcement to initiate quantitative easing (QE) to increase the liquidity of U.S. banks. QE reached $7.09 trillion as of June 17 (see chart).
QE was taken to increase the money supply and stimulate economic growth in the wake of the downturn caused by the coronavirus pandemic. The Fed and the U.S. Treasury are now major buyers of everything from mortgages to U.S. government debt to exchange-traded funds (ETFs) to corporate bonds to money-market funds.
The dilemma is that a large proportion of these markets already were inflated, thanks to the last bailout in 2008. The federal government has committed itself to sustaining the bubble, by paying retail prices for inflated assets. In addition, the Fed is buying up the debt of many "zombie" companies that don't generate enough profits to cover the interest payments on their debt.
The Fed can't keep growing its already massive balance sheet indefinitely. The central bank will eventually run out of ammo. At some point the Fed must cease its monetary stimulus; otherwise it will end up nationalizing the assets of the United States.
Greater liquidity is a painkiller, not a cure for the underlying disease. If the economy doesn't soon return to robust growth and we get hit with a wave of defaults, who will bail out the Fed? There is no entity big enough to bail out our country's lender of last resort. Your portfolio needs to be ready for the next crisis that could await.
Dividing up the asset pie…
According to financial industry studies, up to 75% of portfolio performance is related to asset allocation.
Our flagship publication, Personal Finance, recommends the following portfolio allocations under current conditions (see pie chart).
These allocations are a general rule of thumb and should be tweaked according to your risk tolerance. Stage of life is an important factor as well.
In your stock sleeve, emphasize safe havens such as the utilities sector. This low-beta sector tends to be recession-resistant and stable during crises. For the best utility stocks now, click here for our report.
As for bonds, remain wary of long-term bonds, where you'd be locking in today's low rates for extended periods of time. However, short-term or intermediate-term bonds and bond funds, with lower yields than long-term bonds, reduce the risk of losses.
About 5%-10% of your hedges sleeve should include precious metals, such as gold. The price of gold has soared in recent months, but I think it has further to run. The yellow metal is a classic hedge during uncertainty. Our investment team has pinpointed a small-cap gold miner that's poised to skyrocket. Click here for details.
Gold should pay off handsomely in the coming months. But there's another crisis hedge that many investment advisors tend to ignore: agricultural commodities.
The next great geopolitical struggle could be over food. Many experts predict that there won't be enough food to feed growing populations. Indeed, the pandemic is causing food shortages around the world.
If you're risk averse and seek safer and easier plays on agriculture, consider ETFs. Agricultural ETF portfolios invest in grain and feed products, oilseeds, cotton, corn, wheat, soybeans, cocoa, coffee, sugar, dairy, livestock, poultry, and/or horticultural products. These funds can invest directly in physical assets, the equities of major agri-businesses, or commodity linked futures contracts.
Now's a good time to pocket at least partial gains from your biggest winners; overvalued large-cap tech stocks are good candidates. Elevate the cash level in your portfolio to at least 45%, as the above chart shows.
A biotech bonanza…
I've painted a worrisome picture, but there's no need to panic. You can still make money in this overheated market. One appealing spot now is biotechnology. The coronavirus pandemic is underscoring the vital importance of this sector. Yes, biotech can be risky. That's why you need to pick your spots.
Our research team has found a biotech-focused software firm that's indispensable to what's known as the "briefcase pharmacy." This device can offer patients four major benefits that pharmaceutical companies can't: personalized medicine, speed of production, low cost, and efficiency.
The briefcase pharmacy houses everything required to make new drugs in a 89-centimeter box. All that's needed for the patient to receive tailored treatment for a variety of medical conditions for which no other treatments are available is a bit of DNA.
If our research is correct, we could be mere days away from the FDA introducing the briefcase pharmacy to the world. At the heart of it all will be the company that made it happen. But if you don't act now, you'll miss out on the bonanza to come. Click here for details.
John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com
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